Social Security and Medicare together accounted for 38 percent of federal expenditures in fiscal year 2012. Both programs will experience cost growth substantially in excess of GDP growth through the mid-2030s due to rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment and, in the case of Medicare, to growth in expenditures per beneficiary exceeding growth in per capita GDP. In later years, projected costs expressed as a share of GDP trend up slowly for Medicare and are relatively flat for Social Security, reflecting very gradual population aging caused by increasing longevity and slower growth in per-beneficiary health care costs.Social SecuritySocial Security’s Disability Insurance (DI) program satisfies neither the Trustees’ long-range test of close actuarial balance nor their short-range test of financial adequacy and faces the most immediate financing shortfall of any of the separate trust funds. DI Trust Fund reserves expressed as a percent of annual cost (the trust fund ratio) declined to 85 percent at the beginning of 2013, and the Trustees project trust fund depletion in 2016, the same year projected in the last Trustees Report. DI cost has exceeded non-interest income since 2005, and the trust fund ratio has declined since peaking in 2003. While legislation is needed to address all of Social Security’s financial imbalances, the need has become most urgent with respect to the program’s DI component. Lawmakers need to act soon to avoid reduced payments to DI beneficiaries three years from now.Social Security’s total expenditures have exceeded non-interest income of its combined trust funds since 2010, and the Trustees estimate that Social Security cost will exceed non-interest income throughout the 75-year projection period. The deficit of non-interest income relative to cost was about $49 billion in 2010, $45 billion in 2011, and $55 billion in 2012. The Trustees project that this cash-flow deficit will average about $75 billion between 2013 and 2018 before rising steeply as income growth slows to the sustainable trend rate after the economic recovery is complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Redemption of trust fund asset reserves by the General Fund of the Treasury will provide the resources needed to offset Social Security’s annual aggregate cash-flow deficits. Since the cash-flow deficit will be less than interest earnings through 2020, reserves of the combined trust funds measured in current dollars will continue to grow, but not by enough to prevent the ratio of reserves to one year’s projected cost (the combined trust fund ratio) from declining. (This ratio peaked in 2008, declined through 2012, and is expected to decline steadily in future years.) After 2020, Treasury will redeem trust fund asset reserves to the extent that program cost exceeds tax revenue and interest earnings until depletion of total trust fund reserves in 2033, the same year projected in last year’s Trustees Report. Thereafter, tax income would be sufficient to pay about three-quarters of scheduled benefits through 2087.A temporary reduction in the Social Security payroll tax rate in 2011 and 2012 reduced payroll tax revenues by an estimated $222 billion in total. The legislation establishing the payroll tax reduction also provided for transfers from the General Fund to the trust funds in order to “replicate to the extent possible” payments that would have occurred if the payroll tax reduction had not been enacted. Those General Fund reimbursements amounted to about 15 percent of the program’s non-interest income in 2011 and 2012. The temporary payroll tax reduction expired at the end of 2012.Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable earnings will grow rapidly from 11.3 percent in 2007, the last pre-recession year, to roughly 17.0 percent in 2037, and will then decline slightly before slowly increasing after 2050. Cost displays a slightly different pattern when expressed as a share of GDP. Program cost equaled 4.2 percent of GDP in 2007, the last pre-recession year, and the Trustees project that cost will increase to 6.2 percent of GDP for 2036, then decline to about 6.0 percent of GDP by 2050, and thereafter rise slowly reaching 6.2 percent by 2087.The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.72 percent of taxable payroll, up from 2.67 percent projected in last year’s report. This deficit amounts to 21 percent of program non-interest income or 17 percent of program cost. A 0.06 percentage point increase in the OASDI actuarial deficit would have been expected if nothing had changed other than the one-year extension of the valuation period to 2087. The effects of recently enacted legislation, updated demographic data, updated economic data and assumptions further worsened the actuarial deficit, but these effects were completely offset by the favorable effects of updated programmatic data and improved methodologies.While the combined OASDI program fails the long-range test of close actuarial balance, it does satisfy the test for short-range (ten-year) financial adequacy. The Trustees project that the combined trust fund asset reserves at the beginning of each year will exceed that year’s projected cost through 2027.MedicareThe Trustees project that the Medicare Hospital Insurance (HI) Trust Fund will be the next to face depletion after the DI Trust Fund. The projected date of HI Trust Fund depletion is 2026, two years later than projected in last year’s report, at which time dedicated revenues would be sufficient to pay 87 percent of HI cost. The Trustees project that the share of HI cost that can be financed with HI dedicated revenues will decline slowly to 71 percent in 2047, and then rise slowly until it reaches 73 percent in 2087. As it has since 2008, the HI Trust Fund will pay out more in hospital benefits and other expenditures than it receives in income in all years until reserve depletion.The projected HI Trust Fund’s long-term actuarial imbalance is smaller than that of the combined Social Security trust funds under the assumptions employed in this report.The estimated 75-year actuarial deficit in the HI Trust Fund is 1.11 percent of taxable payroll, down from 1.35 percent projected in last year’s report. The HI fund again fails the test of short-range financial adequacy, as its trust fund ratio is already below 100 percent and is expected to decline continuously until reserve depletion in 2026. The fund also continues to fail the long-range test of close actuarial balance. The HI 75-year actuarial imbalance amounts to 29 percent of tax receipts or 23 percent of program cost.The modest improvement in the outlook for HI long-term finances is principally due to: (i) lower projected spending for most HI service categories�especially for skilled nursing facilities�to reflect lower-than-expected spending in 2012 and other recent data; (ii) lower projected Medicare Advantage program costs that reflect recent data suggesting that certain provisions of the Affordable Care Act will reduce growth in these costs by more than was previously projected; and (iii) a refinement in projection methods that reduces assumed per beneficiary cost growth during the transition period between the short-range projections and the long-range projections. Partially offsetting these favorable changes to the projections are somewhat lower projected levels of tax income that reflect lower-than-expected tax income in 2012.The Trustees project that Part B of Supplementary Medical Insurance (SMI), which pays doctors’ bills and other outpatient expenses, and Part D of SMI, which provides access to prescription drug coverage, will remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs. However, the aging population and rising health care costs cause SMI projected costs to grow steadily from 2.0 percent of GDP in 2012 to approximately 3.3 percent of GDP in 2035, and then more slowly to 4.0 percent of GDP by 2087. General revenues will finance roughly three quarters of these costs, and premiums paid by beneficiaries almost all of the remaining quarter. SMI also receives a small amount of financing from special payments by States and from fees on manufacturers and importers of brand-name prescription drugs. Projected costs for Part B assume an almost 25-percent reduction in Medicare payment rates for physician services will be implemented in 2014 as required by current law, which is highly unlikely.The Trustees project that total Medicare cost (including both HI and SMI expenditures) will grow from approximately 3.6 percent of GDP in 2012 to 5.6 percent of GDP by 2035, and will increase gradually thereafter to about 6.5 percent of GDP by 2087.The drawdown of Social Security and HI Trust Fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident. For the seventh consecutive year, the Social Security Act requires that the Trustees issue a “Medicare funding warning” because projected non-dedicated sources of revenues�primarily general revenues�are expected to continue to account for more than 45 percent of Medicare’s outlays in 2013, a threshold breached for the first time in fiscal year 2010.ConclusionLawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare.By the Trustees: Neither Medicare nor Social Security can sustain projected long-run programs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers. If lawmakers take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.
Jacob J. Lew,
Secretary of the Treasury, and Managing Trustee of the Trust Funds.
Secretary of Health and Human Services, and Trustee.
Charles P. Blahous III,
Trustee.Seth D. Harris,
Acting Secretary of Labor, and Trustee.
Carolyn W. Colvin,
Acting Commissioner of Social Security, and Trustee.
Robert D. Reischauer,
Trustee.Projected long-range costs for both Medicare and Social Security are not sustainable with currently scheduled financing and will require legislative action to avoid disruptive consequences for beneficiaries and taxpayers. If lawmakers act sooner rather than later, they can consider more options and more time will be available to phase in the changes, giving the public adequate time to prepare. Earlier action would also provide more opportunity to ameliorate any adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.What Are the Trust Funds? Congress established trust funds managed by the Secretary of the Treasury to account for Social Security and Medicare income and disbursements. The Treasury credits Social Security and Medicare taxes, premiums, and other income to the funds. There are four separate trust funds. For Social Security, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits and the Disability Insurance (DI) Trust Fund pays disability benefits. (OASDI is the designation for the two trust funds when they are considered on a combined basis.) For Medicare, the Hospital Insurance (HI) Trust Fund pays for inpatient hospital and related care. The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts: Part B, which pays for physician and outpatient services, and Part D, which covers the prescription drug benefit. In 2012, 45.9 million people received OASI benefits, 10.9 million received DI benefits, and 50.7 million were covered under Medicare.The only disbursements permitted from the funds are benefit payments and administrative costs. Federal law requires that all excess funds be invested in interest-bearing securities backed by the full faith and credit of the United States. The Department of the Treasury currently invests all program revenues in special non-marketable securities of the U.S. Government which earn a market rate of interest. The balances in the trust funds represent the accumulated value, including interest, of all prior program annual surpluses and deficits, and provide automatic authority to pay benefits.What Were the Trust Fund Results in 2012? Trust fund operations, in billions of dollars, are shown in the following table. (Totals may not add due to rounding.) The OASI Trust Fund showed a net increase in asset reserves in 2012; reserves in the DI, HI, and SMI Trust Funds declined.
The following table shows payments, by category, from each trust fund in 2012. (Totals may not add due to rounding.)
|reserves (end of 2011)$2,524.1$153.9$244.2$80.7|
|Income during 2012731.1109.1243.0293.9|
|Cost during 2012645.5140.3266.8307.4|
| Net change in Reserves85.6-31.2-23.8-13.5|
|Reserves (end of 2012)2,609.7122.7220.467.2|
Trust fund income, by source, in 2012 is shown below. (Totals may not add due to rounding.)
|Category (in billions)||OASI||DI||HI||SMI|
|Railroad Retirement financial interchange4.10.5——|
a Less than $50 million.
|Source (in billions)||OASI||DI||HI||SMI|
|Taxes on OASDI benefits26.70.618.6—|
|Transfers from States———8.4|
|General Fund reimbursements97.716.50.5—|
In 2012, Social Security’s cost continued to exceed the program’s tax income and also continued to exceed its non-interest income, a trend that the Trustees project to continue throughout the short-range period (2013-22) and beyond. The 2012 deficit of tax income relative to cost was $169 billion. The temporary 2-percentage point reduction in the 2012 OASDI employee payroll tax rate, for which the trust funds were fully reimbursed by the General Fund, accounts for $114 billion of the 2012 deficit.In 2012, the HI fund used interest income ($11 billion) and asset reserves ($24 billion) to help finance expenditures beyond those that could have been made solely on the basis of tax and premium income. For SMI, transfers from the General Fund of the Treasury represent the largest source of income. Because Part B account asset reserves were above the level considered to be adequate at the end of 2011, Part B financing for 2012 was set intentionally to draw down some of the excess reserves, resulting in a decrease of about $13 billion.What is the Outlook for Future Social Security and Medicare Costs in Relation to GDP? One instructive way to view the projected costs of Social Security and Medicare is to compare the costs of scheduled benefits for the two programs with the gross domestic product (GDP), the most frequently used measure of the total output of the U.S. economy (Chart A). Under the intermediate assumptions employed in the reports and throughout this Summary, costs for both programs increase substantially through 2035 when measured this way because: (1) the number of beneficiaries rises rapidly as the baby-boom generation retires; and (2) the lower birth rates that have persisted since the baby boom cause slower growth of the labor force and GDP. Social Security’s projected annual cost increases to about 6.2 percent of GDP by 2035, declines to 6.0 percent by 2050, and remains between 6.0 and 6.2 percent of GDP through 2087. Under current law, projected Medicare cost rises to 5.6 percent of GDP by 2035, largely due to the rapid growth in the number of beneficiaries, and then to 6.5 percent in 2087, with growth in health care cost per beneficiary becoming the larger factor later in the valuation period. Chart A—Social Security and Medicare Cost as a Percentage of GDP